The National Debt and New Constitutional Arrangements

Grady, Patrick (1991): The National Debt and New Constitutional Arrangements. Published in: Economic Council of Canada Working Paper No. No. 26 (October 1992): pp. 1-22.

Abstract

This paper, which draws on the author's book "The Economic Consequences of Quebec Sovereignty," examines the thorny issue of how the existing Canadian federal debt might be redistributed in the event that Quebec were to become a sovereign nation.

Debt division would be at best a "zero sum" game with any gains experienced by one party coming at the expense oflosses experienced by others. Redistribution of the debt means dividing up both assets and liabilities. The paper explores the wide variety of possible approaches, such as population, GDP, tax base, to determining what an "appropriate" share might be. It emphasizes that choosing among them would require painful choices that are bound to generate some degree of acrimony, since many of these would result in significant changes in the burden of debt servicing costs borne by residents of each province. Moreover, it also notes that any dividing-up of assets or liabilities would need to be preceded by an assessment of the value of particular assets and liabilities. This would be one of the largest valuation exercises ever undertaken and the costs involved would probably be substantial. Furthermore, any redistribution of the debt would make it more difficult to service because indi vidual provinces could not expect to borrow at rates of interest that are as favourable as those currently paid by the federal government.

The paper also points to additional transition costs in the form of the likely negative reaction of financial markets to the increased uncertainty surrounding major constitutional changes and the implication of debt redistribution for the credit-worthiness of each province. While there exist various ways to minimize such costs, the paper stresses that this would be possible only if excessive acrimony is avoided.

• Item Type: MPRA Paper
• Language: English
• Keywords: division of debt among successor states after break-up of country
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt

References

Boothe, Paul and Richard Harris "Alternative divisions of federal assets and liabilities," a paper presented at the John Deutsch Conference on Economic Dimensions of Constitutional Change, Queen's University, Kingston, Ontario, 4-6 June 1991.

Coté, Marcel "Canada's constitutional future: a viable option," a presentation to the C. D. Howe Institute Policy Analysis Committee, Montreal, 16 November 1990, p. 3.

Government of Canada, “Task Force on Program Review, An Introduction to the Process of ProgramReview” (Ottawa: Minister of Supply and Services Canada, May- 1986), p. 29.

Government of Quebec, Commission on the Political and Constitutional Future of Quebec, « Elements d'analyse economique pertinents a la revision du statut politique et constitutionnel du Quebec, » Discussion paper no. I, first semester, 1991, pp. 518-58.

Grady, Patrick “The Economic Consequences of Quebec Sovereignty” (Vancouver: The Fraser Institute, 1991).